This guide introduces strategic sourcing and focuses on how this differs to traditional and tactical sourcing, why it is important for organisations, the benefits it can deliver and how it can be successfully implemented within organisations.

It is important to understand how strategic sourcing, if adopted effectively by your procurement team within your organisation, can enhance value and drive cost savings, promotes supplier collaboration, improves supply chain resilience, and fosters sustainability, all of which contribute to an organisation’s long-term success.

 

What is Strategic Sourcing?

It is critical that organisations possess a clear, focused way of thinking and targeted approach to their procurement activity focused on maximising the value suppliers can bring when sourcing products or services from third parties. The development of a sourcing strategy will help you to formalise the way you understand your business requirements, gather information on your internal demand and the external supply market and extended supply chain, so you can find the best possible strategic options and value levers that aligns with your organisation’s long-term goals and objectives.

Strategic sourcing is a long-term process and requires continuous re-evaluation of sourcing activities, analysis of the market/supply chain and recognising your organisations goals. It is important because it can help you save costs and maximise value for money through the monitoring of the market and sourcing from the right suppliers. It also acts as a way to develop and maintain long-term relationships with suppliers, where appropriate, whose way of working are compatible with your organisation’s procurement and business objectives.

There are major differences between traditional sourcing and strategic sourcing. The most significant one being the focus on cost. Traditional sourcing is predominantly about sourcing products or services at the lowest possible cost, whereas strategic sourcing extends beyond pure cost and focuses on the best possible value and looking at the total cost of ownership. With this focus, organisations have shifted from a mindset focused purely on ‘what to purchase and from whom’ to a more strategic consideration of the alternative sourcing options and the value that suppliers can provide.

Other differences between traditional sourcing and strategic sourcing include:

  • Strategic sourcing considers all costs associated with an organisation’s operations when considering the purchase.
  • Traditional sourcing typically focuses on supplier pricing, but it’s essential to understand that price is just one aspect to consider when undertaking strategic sourcing.
  • While traditional sourcing often relies on locally known suppliers, strategic sourcing considers global markets and supply chains in the pursuit of more efficient sources of supply
  • Strategic sourcing prioritises value and the highest possible quality at the lowest cost, whereas traditional sourcing may focus on high volumes to secure mass discounts.

 

The Importance of Strategic Sourcing

Strategic sourcing is important because it helps organisations reduce overall costs and enhance value for money over time. The strategic sourcing process encourages the selection of suppliers based on their ability to deliver the organisation’s business requirements in alignment with the organisation’s long-term goals and objectives, rather than short-term price benefits for the purpose of increasing overall profitability.

There are multiple reasons why it’s so important:

  • Cost Savings and Profitability: Strategic sourcing systematically seeks ways to obtain the best purchase price throughout the entire supply chain. Every pound/dollar/euro saved directly impacts the bottom line, giving organisations a competitive advantage.
  • Supplier Collaboration: By working closer and collaboratively with suppliers, strategic sourcing fosters better relationships. These can lead to improved terms, better deals, preferential treatment, access to innovation, and enhanced performance ultimately benefiting the organisation.
  • Supply Chain Resilience: Strategic sourcing sets up a reliable supply chain by identifying quality alternatives in case a primary supplier becomes unavailable. This resilience ensures business continuity even during disruptions.
  • Quality and Performance Improvement: Organisations can enhance the quality of products or services procured through strategic sourcing due to the consideration of a wider pool of potential suppliers, enabling them to ascertain the best overall value rather than simply choosing the cheapest or fastest option.
  • Sustainability and Efficiency: Strategic sourcing aligns spend and demand profiles, market and supply chain conditions, and supplier bases to create a strategy that delivers business goals. It reduces the Total Cost of Ownership (TCO), improves acquisition efficiency, and enhances price forecasting visibility.

 

The Benefits of Strategic Sourcing

The benefits of rethinking and implementing strategic sourcing processes and initiatives can be far-reaching. As organisations move from tactical and traditional procurement approaches, taking advantage of the vast amounts of available data, to more strategic sourcing approaches the benefits will be significant.

  • Transformed sourcing: Strategic sourcing can transform a process focused merely on cost savings to one that maximises value. It can also optimise long-term decision-making and maintain effective relationships with suppliers.
  • Increased efficiency and productivity: Strategic sourcing can pre-qualify suppliers for future initiatives, which shortens sourcing timelines. By automating transactional purchasing activities individuals can focus on more productive and strategic value-adding tasks. This relies on robust data and analytics to streamline decision-making and other processes.
  • Cost savings: Analysing the total cost of ownership (TCO) leads to more significant long-term cost savings, which will have a direct, positive impact on financial profitability, as opposed to sales revenue, which is reduced by commissions, overhead costs and costs of gold sold, among other expenditures. This requires data and market analyses that pinpoint the best suppliers to deliver the cost savings.
  • Market and supplier intelligence providing risk visibility: An in-depth understanding of supply markets and supply chains can help identify risks and enable businesses to develop sourcing plans to improve risk management and mitigate risk. This may lead procurement teams to diversify their suppliers’ locations and implement contingency strategies.
  • Improved demand forecasting: Analyses of spend and contracts can lead to more accurate demand forecasting and the visibility needed to ensure continuous improvement and meet future customer demand.
  • Increased flexibility and responsiveness: Continued improvement and sustainability of supply chains lets businesses adapt and respond to external factors and changes.
  • Improved compliance: Strategic sourcing identifies suppliers whose values and practices align with their organisations’s goals. Compliance is necessary, not strategic, but strategic sourcing ensures suppliers meet compliance and regulatory guidelines to help protect your organisation’s brand image and reputation.
  • Strong supplier relationships: Strategic sourcing may lead to collaborative and long-term relationships with suppliers as organisations adopt better demand management planning approaches. Fostering collaborative supplier relationships will provide opportunities to innovate and usually pave the way for more favourable contractual terms.
  • Supply chain efficiency: Careful analyses will pinpoint useful improvements to streamline supply chain processes.

 

The Strategic Sourcing Process

The sourcing process can be a complicated one. Strategic sourcing is an organisation-wide process which requires inputs from all departments and teams. Organisations should form a strategic cross-functional sourcing team aligned with the business strategy. 

Organisations may have strategic sourcing processes consisting of steps ranging in number from four to ten. While the 7-Step Processes developed by AT Kearney is widely recognised, regardless of the number of steps a best practice strategic sourcing process should contain the following key activities:

Determine your Business Needs

At the very outset make sure to engage a cross-functional team to clearly define the sourcing category or commodity and determine the specific needs of organisation. Key questions to address include: Who are the end customers to these goods or services, where are they located, what kind of logistics are being deployed, and who else is included in the supply chain?  An efficient and effective sourcing process begins with understanding the category and commodities that an enterprise needs in order to achieve its goals and spend visibility is the key to gain that understanding. Information should be stored, categorised and analysed.

 

Supply Market Analysis

After the analysis of internal demand, it is important to analyse the supply market and suppliers from which you will source your requirements. This will include analysis of the supplier’s marketplace for risks and opportunities and factor in all the costs, from raw materials to transportation. Researching the price aspects that make up the product or service (i.e. the raw material costs and other elements such as labour and logistics) will inform the understanding, analysis and subsequent evaluation of total cost of ownership within proposed bids from suppliers. Go the extra mile to research the marketplace to find potential suppliers locally and globally along with the risk and opportunity factors.

 

Develop a Sourcing Strategy

Choosing how and where to purchase the product or service while maximising value, reducing risk and price is a huge challenge for procurement professionals. If you already have an existing supplier, then re-negotiation could also be an option. The sourcing strategy you create should align with your organisation’s business objectives and corporate goals along with available capabilities and resources. It is critical that a cross-functional sourcing team develops this sourcing strategy that involves stakeholders, subject matter experts, and end customers from across the business.

 

Undertake a Sourcing Exercise to Identify Potential Suppliers

The implementation of the sourcing strategy is the heartland for procurement professionals. The most frequently adopted ways to find a potential supplier is through the use of RfX. For example, using RFPs (Request for Proposal) provides a well understood process for soliciting bids including product or service-related specifications, cost breakdown and analysis, delivery and service requirements, and financial/legal terms and conditions. In some scenarios, evaluation criteria can also be included. The essential steps to researching and selecting potential suppliers includes: ensure you understand your existing supplier base, research additional suppliers, and develop clear supplier qualification and assessment criterion based on your business requirements.

 

Supplier Selection and Negotiation

Select your supplier once all proposals are in and ask for clarification where needed. The process of selecting a potential supplier involves talking to different suppliers and conducting appropriate meetings with short-listed suppliers with multiple rounds of negotiations. The selection of the supplier and negotiations should be based on a robust process with assessment based on pre-agreed criterion. The subsequent contract drafted should be read and signed by both parties.

 

Contract Award and Implementation

When executing and integrating the contractual relationship with the supplier it is important to ensure it is set-up for success. Make sure that the supplier, internal end customers, and other stakeholders who are affected by the process are involved in the design and execution of the solution. Internal stakeholders should be involved from the front-end of the solution, but it is important to recognise that the smooth execution is only possible with a transparent process and extensive communication across the relevant organisations.

 

Contract and Performance Management 

The benchmarking and tracking of performance are essential to determine the success of any strategic sourcing project. Leading-edge technological solutions applied to the tracking of performance (including cost savings) can ensure full value is being achieved and help in finding when and where the supplier is adding additional value. Automated reporting can provide faster and precise feedback for supplier performance management and improvement and also contribute to optimised supplier relationship management (SRM).

The sourcing process undoubtedly plays a critical part in assisting organisations meet their business goals and requirements. An ineffective sourcing process can delay your organisation in achieving its goals and objectives so while organisations can have a variety of procurement requirements and sourcing processes in place, the aforementioned steps can certainly be customised to guarantee success.

 

The Challenges of Strategic Sourcing

Strategic sourcing is a crucial aspect of procurement, but it comes with its fair share of challenges. Let’s explore some of these challenges and key strategies for organisations to overcome them:

  • Poor Supplier Insight: Organisations often lack insight and visibility into their suppliers’ operations, capabilities, production capacities, or financial stability. This hampers collaboration and decision-making processes as it becomes difficult to evaluate potential risks or identify opportunities for improvement.
  • Enhancing Value and the Balance Between Cost and Quality: While reducing costs is important, organisations must ensure that cost reductions do not compromise product or service quality. Maintaining a delicate balance between these is critical to avoid negative impacts on customer satisfaction and brand reputation.
  • Price Negotiation: Negotiating the best prices is critical during the sourcing process and organisations need the necessary resources and negotiation skills to secure favourable terms with suppliers.
  • Unreliable Suppliers: Ensuring that suppliers provide high-quality products and services is vital. Reliable suppliers who consistently deliver products and services to the desired quality levels on time is essential. Organisations must conduct due diligence and thorough research to identify and evaluate potential suppliers. A clear understanding of their needs and an effective supplier selection strategy are critical. Organisations must also implement robust quality control measures to maintain standards.
  • Maintaining Regulatory and Ethical Compliance: Organisations must navigate complex regulatory environments and ensure their suppliers adhere to these requirements. This includes labour standards, environmental regulations and ethical sourcing practices.
  • Fluctuating Supplier Demand: Visibility for consumers is needed beyond your organisation and supply chain transparency is desired by customers. This includes tracking shipments and product status, as well as choosing suppliers and distributors. Responsible and sustainable sourcing is essential.
  • Limited Resources and Budget: Organisations must allocate sufficient resources and budget for effective sourcing. These constraints often lead to tactical sourcing and prevent quick adaptation to changing market conditions.

To address these challenges, organisations can adopt innovative strategies, such as developing a comprehensive strategic sourcing plan (as part of a robust category strategy). This plan outlines objectives, supplier details, pricing, quality control, and other knowledge to inform the development of strategic options and subsequent decision making. By navigating these obstacles strategically, businesses can enhance their sourcing efficiency and effectiveness.

 

Strategic Sourcing Best Practices

With very busy workloads, sourcing professionals often struggle to find the time to rise above the day-to-day tactical purchasing ‘churn’ to think strategically. There are a number of recommendations to support the evolution from tactical to strategic sourcing.

  • Think Long-term: Short-term thinking in procurement may help get the job done and generate immediate cost savings, but it leaves no room for long-term and sustainable improvement and value creation. Long-term thinking, however, requires a long-term investment. You may not realise the value of investments such as procurement technology, capability development, or a process change for several months. Ultimately, the benefits should be greater than any short-term lever such as aggressive supplier negotiation. 
  • Switch from a reactive to a proactive/preventative approach: By the time a disruptive event has taken place – e.g. a sudden steep rise in commodity prices – it is usually too late for procurement to do much about it. However, planning ahead with long-term hedging strategies such as just-in-case supply management can keep business operations moving and create a competitive edge.
  • Creative Improvement: With constantly evolving capabilities, ways of working, and technologies, there’s no such thing as a ‘perfect’ procurement function. However, being strategic means taking nothing for granted and constantly looking for creative ways to improve. Is there a better tool to improve your spend visibility? What innovation is available to improve efficiency? Do you have the skills required to shift to a sustainable procurement model?
  • Measure Performance Improvement: It is important to recognise that you can only improve something if you measure it first. Establish and track a set of procurement KPIs that are tied to business-level goals and targets such as cost reduction, maverick spend reduction, supplier innovation, time to source etc.
  • Look beyond cost: Focusing solely on cost is not being strategic. Yes, there are times (when inflation is high) when cost reduction takes priority, but strategic procurement professionals know there are several other factors to take into account. This wider understanding of value includes a focus on: total cost of ownership (TCO), innovation, security of supply, quality, delivery, sustainability, social value etc.
  • Data-based decision-making: Becoming strategic in procurement means making better quality decisions supported by real-time robust and rigorous data. This requires collecting and analysing spend data with the help of sophisticated spend analytics software. Data in procurement will help identify cost savings opportunities, reduce risk, provide insight into spending patterns, increase efficiency, and forecast surges in demand so you can take preventative action.
  • Alignment with the business strategy: Procurement strategy should not exist in a vacuum – every strategic initiative should be clearly linked to an overall business strategy. You may wish to create an extra column in your KPI trackers that shows how each procurement goal reflects an organizational goal. As business strategies can shift without warning as economic conditions or leadership priorities change, procurement must stay agile and avoid a rigid approach to strategic goals. Conduct regular alignment checks to ensure procurement stays focused on the right things.
  • Building relationships: Being strategic with suppliers involves recognising you will create more value in the long-term than you will achieve by focusing on short-term gain. Effective contract management (or a SRM program for appropriate suppliers) will improve quality of service, more timely delivery, increased customer satisfaction, unlock better deals, get better support, and save money.

Need help with your strategic sourcing strategy? Get in touch with 4C Associates today.

    

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